c c c c 4 4-1 LEARNING OBJECTIVES After studying this chapter, you should be able to 1 Explain the conditions that must exist for an item to be excluded from gross income 2 Determine whether an item is income 3 Decide whether specific exclusions are available 4 Understand employment-related fringe benefit exclusion items CHAPTER GROSS INCOME: EXCLUSIONS

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4-2 Individuals ▼ Chapter 4 CHAPTER OUTLINE Items That Are Not Income. ..4-2 Major Statutory Exclusions. ..4-4 Tax Planning Considerations. ..4-22 Compliance and Procedural Considerations. ..4-23 KEY POINT Given the sweeping definition of income, it is generally difficult to establish that an item is not income. EXAMPLE I: 4-1 c EXAMPLE I: 4-2 c Chapter I:3 discussed specific items that must be included in gross income. This chapter considers items that are excluded from gross income. Under Sec. 61(a), all items of income are taxable unless specifically excluded. Taxpayers who wish to avoid being taxed have two basic alternatives. One approach is to establish that the item is not income. If an item is not income (e.g., if it is a return of capital), it is not subject to the income tax. The second approach is to establish that a specific exclusion applies to the item of income. Matt borrowed $10,000 from the bank. Although Matt received $10,000, it is not income because he is obligated to repay the amount borrowed. No specific statutory authority states that borrowed funds are excluded from taxation. Presumably, the fact that borrowed funds are not income is considered to be both fundamental and obvious. b Sheila enrolled in State University. The university awarded her a $1,000 tuition scholarship because of her high admission test scores and grades. Section 117 excludes such scholarships from gross income. As a result, Sheila need not report the scholarship as income. b The major source of exclusions are those specific items contained in the IRC. These exclusions have evolved over the years and were enacted by Congress for a variety of rea-sons, including social and economic objectives. Another source of exclusions are referred to as administrative exclusions. Exclusions exist because specific provisions in the Internal Revenue Code allow them. While the IRS has no authority to create exclusions, the IRS does have the authority to interpret the meaning of the Code. A liberal interpretation of the statute by the IRS may result in a broad definition of what constitutes an exclusion, and such a broad definition may rea-sonably be termed an administrative exclusion. For example, Sec. 102 excludes gifts received from gross income. The IRS has followed the practice of excluding certain wel-fare benefits from gross income, presumably because such benefits may be viewed as gifts. 1

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